Definition
The Statement of Retained Earnings is a financial statement that comprehensively outlines the changes in retained earnings for a company over a specified reporting period. It reconciles the beginning retained earnings with the ending retained earnings, highlighting contributions such as net income and dividends distributed to shareholders.
| Main Term | Similar Term |
|---|---|
| Statement of Retained Earnings | Statement of Owner’s Equity |
| Purpose: Reflects changes in retained earnings | Purpose: Shows equity owned by shareholders |
| Focus: Retained earnings and dividends | Focus: Entire equity structure of a company |
| Period: Covers a specific accounting period | Period: Annual or ongoing updates |
Examples of Retained Earnings Calculation
For illustrating purposes, here’s a fictional company named “FunCo”:
- Beginning Retained Earnings: $40,000
- Net Income: $20,000 (great sales of silly hats! š©)
- Dividends Paid: $10,000 (who doesn’t love a little cash in hand? šø)
Retained Earnings Formula
The formula for calculating the retained earnings at the end of the period is:
\[ \text{Ending Retained Earnings} = \text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends Paid} \]
Plugging our numbers in:
\[ \text{Ending Retained Earnings} = 40,000 + 20,000 - 10,000 = 50,000 \]
Related Terms
- Net Income: The profit a company makes after all expenses have been deducted from revenues, and often considered the fuel that drives the retained earnings car.
- Dividends: Payments made to shareholders from earnings. Itās like the “thank you” note you get from a company after a good year of holding their stock.
- Owner’s Equity: Represents the ownership stake in the company, nominally speaking itās the “what’s left over” after everyone else gets paid.
Visual Representation
graph TD
A[Beginning Retained Earnings] -->|Net Income| B(Net Income)
B --> C[Total Available]
C --> D[Dividends]
D --> E[Ending Retained Earnings]
Humorous Insights
- āRetained earnings: putting the ‘fun’ in ‘fundamental accounting principles.’ Who knew profits could be so thrilling?ā š
- āThe more retained earnings you accumulate, the less often you need to ask your boss for a raise. Just saying!ā š¼
- Fun Fact: If a company had retained earnings that were a little too high, it might start accepting applications from ‘prudent-fund-enthusiasts.’
Frequently Asked Questions
Q: What if a company has negative retained earnings? A: That’s a higher score than I have at my favorite board game! š Negative retained earnings indicate accumulated losses and may raise concerns for investors.
Q: Can retained earnings be used for any purpose? A: Yes! Retained earnings can be reinvested into the business for growth, saved for future needs, or cozied up with your favorite dividends.
Q: Is the statement of retained earnings found in the income statement? A: No! Itās like trying to find the last slice of pizza in a salad bowl. It must be sought separately in the equity section of the balance sheet.
Further Study and Resources
- Investopedia - Statement of Retained Earnings
- “Principles of Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- “Financial Accounting” by Robert Libby, Patricia A. Libby, and Daniel G. Short
Test Your Knowledge: Statement of Retained Earnings Quiz
Thank you for diving into the world of retained earnings! Remember: Itās not just about crunching numbers; itās about what those numbers can tell you about the value of a company. Keep smiling and keep learning! š
